Dimensional weight pricing changes are paying off for FedEx

When parcel bellwether FedEx announced last spring that, effective January 1, 2015 it would apply dimensional pricing to all shipments moved via FedEx Ground, as opposed to its method (at the time) of applying dimensional weight pricing to packages that measure three cubic feet or more, the end result of that move, as predicted by industry experts, was that these changes would be a major hit to shippers.

The reason for that, they explained, was that these changes would serve strictly as margin improvement, as dimensional pricing does not provide additional work or additional capacity investments, instead it enables FedEx (and UPS) to receive more incremental revenue on the same shipments handled.

FedEx defines dimensional weight pricing as “a common industry practice that sets the transportation price based on package volume–the amount of space a package occupies in relation to its actual weight.”

Based on FedEx’ fiscal third quarter earnings results issued yesterday, it appears that its new dimensional pricing strategy is clearly working.

The topic of dimensional pricing was highlighted at various times during yesterday’s earnings call with Wall Street analysts, and each of the company’s pricing strategies that offers dimensional pricing saw annual gains, including FedEx Ground revenue and operating income up 12 percent and 14 percent, respectively, and was ahead up volume growth, which increased by 7 percent. On top of that FedEx Ground package yields were up 3.7 percent and revenue per package was up 3 percent.

While the gains from dimensional pricing were apparent in the results, Rob Martinez, president & CEO, Shipware Systems Corp, a San Diego-based parcel consultancy, pointed out that the fiscal third quarter was comprised of December 2014, January 2015 and February 2015.

“Because it wasn’t implemented until Jan 2015, the dimensional pricing was only in place for 8 of the 13 weeks reported,” said Martinez. “Moreover, FedEx handled more Ground packages during those 5 weeks in December than they did in the other 8 weeks reported when the new dimensional weight pricing was in place.  Therefore, we’ll have a much better understanding of the impact when FedEx reports on Q4 earnings in 3 months.”

Martinez explained that on yesterday’s earnings call FedEx executives said that because provided customers with six months notice, many shippers were able to change packaging in an effort to minimize higher costs associates with dimensional weight pricing.

“But that also has a very significant, positive impact on FedEx margins simply in the fact that more dense freight allows FedEx to operate fewer trucks,” he said. “So FedEx wins on both fronts:  higher revenue per package on many Ground shipments, and denser freight on others.

And he added it is worth noting that even though a 14 percent gain in operating income is terrific, it could have been even better. 

“Operating income was partially offset by higher costs for network expansion, temporary seasonal workers and other costs associated with holiday delivery,” he said.  “Again, Q4 numbers will tell us the real story, which I think will be very rosy for FedEx shareholders (but not so good for shippers bearing the costs!).”

Jerry Hempstead, president of Orlando, Florida-based parcel consultancy Hempstead Consulting, said in a 2014 interview that the shift in FedEx Ground’s pricing would be a huge change, which he had been predicting for several years.

Until this change, he said shippers essentially benefitted from transactions of 3 cubic feet or less.

“Say you put 5 pounds in a box that is 3 cubic feet,” he said. “Today you get charged for 5 pounds, and January 1 you get charged for 32 pounds. Now it’s May of 2014 and the change is effective January 1, 2015. [There is] plenty of time to telegraph to their competitors that they, too, need to implement this change…because if it’s not adopted by, say, UPS then most every major shipper needs to start working on a switch of their ground carrier. My take is that this change results in such massive incremental revenue and is pure profit, ad FedEx is doing no additional work or adding any additional service to justify this enormous cost increase. This is horrible news for shippers. Hopefully they have language in their contracts to mitigate or postpone this pain.”